Optimal Liquidity Provision Through a Demand Deposit Scheme: The Jacklin Critique Revisited

Authors


Address for correspondence: Alexander Zimper, Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa. Tel.: +27 12 420 3522; fax: +27 86 691 2749; E-mail: alexander.zimper@up.ac.za

Abstract

We derive conditions such that optimal liquidity provisions through a demand deposit scheme can be sustainably implemented in a subgame perfect Nash equilibrium under the assumption that renegade investors have free access to ex post asset markets. As our qualitative main finding we demonstrate that such sustainability is more likely for ‘poor’ than for ‘rich’ scheme participants in terms of future income. By establishing sustainability for low future income populations, our formal analysis therefore offers an important qualification of Jacklin's (1987) influential claim that an optimal demand deposit scheme is not sustainable whenever there exists the possibility of an ex post asset market.

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